[July 11, 2017]

Think Housing is Unaffordable Now? Just Wait until Next Year…

While the risk of price declines remains low, affordability is increasingly a concern in cities across the U.S., according to the Summer 2017 edition of The Housing and Mortgage Market Review (HaMMR?), published by Arch Mortgage Insurance Company ("Arch MI"). San Francisco's housing costs are the highest in the country, while Detroit's are the cheapest. Of the nation's 10 least affordable cities, seven are in California. Meanwhile price declines are less of a concern, as strong housing market fundamentals suggest the average risk of home price declines over the next two years remains unusually low at only 4%. The Arch MI Risk Index^® statistical model is based on nine housing market health indicators, including unemployment and delinquency rates and if home prices are over- or undervalued relative to incomes.

"A tight job market, interest rates that are still low and an overall shortage of housing are pushing up home prices faster than incomes," said Dr. Ralph G. DeFranco, Global Chief Economist, Mortgage Services of Arch Capital Services Inc. "That's good news for those who already own, but bad news for those looking to buy. I expect prices and rates to rise, meaning affordability will only worsen from here. In fact, once mortgage interest rates reach 5%, homeownership in high-cost areas like California could be out of reach for many people who qualify now."

Over the past two years, affordability has deteriorated the most in San Diego, Miami and the San Francisco Bay Area, as prices shot up faster than incomes. The greater New York City metropolitan area, in contrast, saw the largest improvement in affordability, due to a temporary building boom triggered by the expiration of a local tax credit at the end of 2015. Still, New York is more expensive, relative to median incomes, than all but nine American metro areas.

The HaMMR report, released today by Arch MI, a leading provider of private mortgage insurance and wholly owned subsidiary of Arch Capital Group Ltd., presents the state- and metro-level Arch MI Risk Index model results of the likelihood home prices will be lower in two years, based on recent economic and housing market data. The report is posted at archmi.com/hammr. The Summer 2017 edition also features a special focus on affordability, including articles on America's least and most affordable cities, the biggest changes in affordability and the potential impact of an interest-rate increase on mortgage affordability.

Detailed and interactive regional graphs and maps showing relative over- or undervalued home prices are also available at archmi.com/hammr.

On a state level, Alaska, North Dakota and Wyoming remain most at risk of home price declines, joined this quarter by West Virginia. These states continue to be impacted by weak employment and home sales due to the unwinding of the energy boom or from high inventories of homes for sale.

• North Dakota has an Arch MI Risk Index value of 38 (indicating a 38 percent chance of a price decline of any magnitude over the next two years), unchanged from last quarter. Home sales are weak in the state and home price growth is decelerating. Additionally, home prices are high relative to their historical relationship to incomes.
• Wyoming has an Arch MI Risk Index value of 30 compared to last quarter's Risk Index value of 36. The state remains in recession due to the decline in mining, but employment appears to be moderating.
• Alaska has an Arch MI Risk Index value of 33, up modestly from 31 in last quarter's report. The state of Alaska remains in recession due to declining oil production and significant state budget deficits. Home price growth is decelerating and declines in total employment have yet to stabilize.
• West Virginia has an Arch MI Risk Index value of 27, up from 21 last quarter, largely due to continued employment weakness.

Within the Arch MI Risk Index values for the 50 most populous Metropolitan Statistical Areas ("MSAs"), all MSAs register in the "low" and "minimal" risk category.

Dr. DeFranco will be hosting two webinars discussing the implications of the latest Housing Review on Thursday, July 13 and Friday, July 14. Registration is free at archmi.com/hammr.

About Arch MI's Housing & Mortgage Market Review and Risk Index

The Housing & Mortgage Market Review^®, which presents Arch MI Risk Index^® results, is published quarterly by Arch Mortgage Insurance Company. The Risk Index is a proprietary statistical model that measures home price risk by estimating the probability that home prices in a state or one of the nation's 401 largest metropolitan statistical areas (MSAs) will be lower in two years. For example, a score of 25 indicates a 25 percent chance the FHFA All-Transactions Regional Housing Price Index (HPI (News - Alert)) will be lower in two years. The Arch MI Risk Index weights various local economic and housing market factors, such as affordability, unemployment rates, economic growth rates, net migration, housing starts, etc., based on a statistical model built on data going back to the early 1980s. It estimates the likelihood of seeing negative home prices, and does not indicate the size of any declines. The Arch MI Risk Index is updated after each quarterly release of the FHFA All-Transactions Regional HPI. The complete current set of Risk Index values can be reviewed at archmi.com/hammr.

Detailed, interactive regional graphs and maps are available on Arch MI's website, showing relative over- or undervalued home prices at archmi.com/HPI-Charts-and-Maps.

ABOUT ARCH MORTGAGE INSURANCE COMPANY

Arch Capital Group Ltd.'s U.S. mortgage insurance operation, Arch MI, is a leading provider of private insurance covering mortgage credit risk. Headquartered in Greensboro, North Carolina, with significant operations in Walnut Creek, California, Arch MI's mission is to protect lenders against credit risk, while extending the possibility of responsible homeownership to qualified borrowers. Arch MI is a marketing term for Arch Mortgage Insurance Company, Arch Mortgage Guaranty Company, United Guaranty Residential Insurance Company and United Guaranty Mortgage Indemnity Company. Arch MI's flagship mortgage insurer, Arch Mortgage Insurance Company, is licensed to write mortgage insurance in all 50 states, the District of Columbia, and Puerto Rico. For more information, please visit archmi.com.

The Housing and Mortgage Market Review and the Arch MI Risk Index are registered marks of Arch Mortgage Insurance Company. HaMMR is a service mark of Arch Mortgage Insurance Company.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its subsidiaries may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements.

Forward-looking statements can generally be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology. Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and our ability to maintain and improve our ratings; investment performance; the loss of key personnel; the adequacy of our loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; our ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to us of reinsurance to manage our gross and net exposures; the failure of others to meet their obligations to us; and other factors identified in our filings with the U.S. Securities and Exchange Commission.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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